Tuesday, March 23, 2010


EELII (Edelweiss ET Lead Indicator Index) keeps moving north
The Edelweiss ET-Now Lead Indicator Index (EELII), which is a composite weighted average index of a number of macro-variables exhibiting strong predictive ability of the core trends in the Indian economy, continues to strengthen. EELLII has been closely predicting the upturn in the economic cycle during the past few quarters. From a trough of ~73 in Q4FY09, EELII reached ~115 by Q4FY10. During FY10, thus, EELII records a growth of ~42 points – the highest in this current decade.

For April 2010, the value of EELII stands at ~121, up significantly from ~79 in April 2009. A value of ~100 for EELII suggests non-agriculture GDP growth of ~9% Y-o-Y.

Current uptick broad based, driven by multiple factors
Each of the lead variables constituting the index affects the real economy with different lead periods. For example, as per our model, the effect of change in policy interest rates (repo rate) is most pronounced on the economy with a lead of ~9-12 months, while the impact of change in commercial vehicle production is the highest with a lead of around three months. EELII has historically predicted non-agriculture GDP growth closely; the adjusted coefficient of determination (adjusted R-squared) for the multiple regression is over 0.80.

The uptick in EELII in the recent months was driven the most by strong production of commercial vehicles, cement dispatches, pick-up in non-oil imports, continuation of resource mobilisation in the domestic primary market and a reasonable interest rate scenario.

Third quarter macro developments map uptick in EELII
In the previous releases, EELII had indicated that non-agriculture (industry and services) growth would be over 9% in Q3FY10. The reported growth in non-agriculture GDP comes to ~8% for Q3. On the other hand, the projected growth in non-agri GDP had significantly surpassed the forecast of EELII in Q2. This has largely been due to the lumpiness in the government expenditure that had taken place during Q2FY10 (~13% Y-o-Y), courtesy the second tranche of the Sixth Pay Commission related disbursals, followed by a decline in Q3 (-2.2% Y-o-Y). While the actual non-agri GDP had been higher than projected in Q2 and lower in Q3, if one adjusts the lumpiness in the government spending, the trajectory of non-agri GDP mimics the trends in EELII.

In fact, even in Q3FY10, non-agri GDP (ex-government spending) records a growth of
~10% and is perfectly in line with the path projected by EELII.

Several other indicators coincident with GDP, viz. IIP growth, core sector growth, Purchase Manufacturer’s Index (PMI - India) firmly indicate towards quarterly strong non-agri GDP growth. During this period (October-December 2009), Y-o-Y growth in IIP averaged at ~13%. While some part of this is on account of a low base, substantial contribution to this growth is from pick-up in manufacturing and mining activities. Given the strong uptick in core growth trends in the economy, overall GDP growth for FY10
should ultimately be over 7%.

■ Government policies backing growth well
The government announced the Union Budget for FY11 amidst market speculation of a dilemma between need for focus on (a) growth, and (b) fiscal consolidation and stimulus rollback. Budget managed to do the tight rope walk of reining in the high deficit without hurting the ongoing growth recovery.

Finally, rollback of stimulus turned out to be selective and gradual – excise and customs duties were increased partially, while service tax rate was kept unchanged. Moreover, an effective reduction in income tax will put more money into the hands of consumers. Social sector programmes do not go out of the radar of the government with continuing support for rural employment and rural infrastructure. Overall, government did not resort to any severe fiscal policy contractions, keeping a steady eye on supporting broad-based growth recovery. While on one hand the gradual unwinding of the stimulus signifies that government is confident of growth, the budget also underscores the caution of policy-makers to ensure that the recovery momentum does not lose steam.

Monetary action to be slow but steady – “staying behind the curve” may be the preferred choice
Given the continued positive surprises on GDP and IIP fronts, inflation staying high, and current policy rates being far lower than their “steady state” levels, we expect the RBI to be cautious, start hiking policy rates at a slow pace from April 2010 onwards. However, such hikes will definitely be gradual - RBI will refrain from taking any hasty move based on point–to-point data releases. Such a tightening at the moment will not be a shocker as (a) a hike in policy rates will indicate RBI’s confidence in robustness of the economic recovery, and (b) even after the first few hikes, policy rates will still stay far below their “steady-state” levels (e.g., long-term average level of repo rate in India is ~6.0-6.5%). We think, both repo and reverse repo rate will witness a cumulative tightening of 100-125bps during FY11.

To read the full report: LEAD INDICATOR INDEX

>Rate hike in line with expectations, more expected; remain positive (GOLDMAN SACHS)

Lending and deposit rates likely to rise post monetary policy
The RBI has hiked both the repo and reverse repo rate by 25bp to 3.5% and 5.0%, respectively. Our ECS Research team expects another 25bp hike in policy rates in April 2010 and an aggregate increase of 150bp in both repo and reverse repo (including the above two) through 2010. We believe this will likely reflect in: (1) short-term rates which could increase by 300 bp– impacting bulk borrowers and AAA companies active in this segment; (2) GSec yields – which will likely range between 8%-8.5%, on the back of fiscal consolidation; and (3) PLR and deposits rates, which will likely increase by 100 -150 bp over the next one year. We believe banks are unlikely to hike PLR and deposit rates immediately given excess liquidity in the system and will likely revisit this post the monetary policy in April 2010.

We have an attractive stance on Indian banks
We have an attractive stance on the sector and think a buoyant economy will offset risk of rising rates. In our view, stock price performance will be driven by: (1) a strong economy: our ECS Research team projects GDP growth for FY11E at 8.2%/FY12E at 8.7%, vs. 6.6% in FY10E; (2) strong earnings growth driven by higher credit growth (20% for FY11E/FY12E vs. 15.8% as per RBI data released on Feb 26), higher margin/fees and lower NPLs in FY10E-12E; and (3) limited risk of MTM on GSec book given likely more benign GSec yields. We prefer banks with: high earnings growth, low risk to balance sheet, and high/improving RoEs.

Our top recommendations:
(1) Bank of Baroda (Buy, CL): Attractive valuations relative to high RoE (>21%) & earnings (15% CAGR), better asset quality. (2) HDFC Bank (Buy, CL): Strong franchise, retail theme, high CASA (52%), low bulk deposits (5%), low impaired assets, high Tier-I. (3) Punjab National Bank (Buy): High CASA (40%), low AFS (18%), highest return ratios amongst PSUs (23% RoE). (4) IndusInd Bank (Buy): Turnaround underway, uptick in key metrics, niche name with 40% book in retail, more benefit from restructuring to accrue. (5) LIC HF (Sell, CL): Exposure to mortgage space, but wary of high growth as this will likely jeopardize profitability.

(1) Elevated inflation levels could lead to stronger measures by RBI; (2) slippage in fiscal deficit could lead to crowding out of private investments/rise in GSec yields.

To read the full report: FINANCIAL SERVICES

>A normal monsoon for 2010? (EDELWEISS)

Weather forecasts see high probability of normal monsoon in 2010
• After a dismal performance by the southwest monsoon in 2009, recording a rainfall deficiency ~22% of long period averge (LPA), southwest monsoon 2010, for India, is expected to be ‘largely’ normal, as forecasted by The International Research Institure (IRI) for Climate and Society.

• As per their latest available forecasts for 2010, there is probability of delay in arrival of South-West monsoon, with the initial phase of onset and advancement witnessing below normal rainfall, especially in North coastal Andhra Pradesh, Vidarbha, Orissa, Chattisgarh, Jharkhand, Bihar and Gangetic West Bengal.

• The forecast however, sees high probability of revival in rainfall during the months of May, June and July (the period of maturity of rains), with most of these months recording normal rainfall. The fully mature monsoon (during the months of June, July and August) is expected to be normal.

• The prevailing El Niño condition over the Central Pacific ocean is expected to start fading out from July onwards. An El Niño condition, which is essentially the warming up of the Pacific waters, is said to weaken Asian monsoon. It had been one of the main reasons for the occurrence of three droughts in India in the recent past. Generally, the year following an El Niño year is considered to be favourable for Indian monsoons.

To read the full report: MONSOON 2010


The domestic demand of Aluminium is lower and the same is the situation in international
markets, where prices are consolidating in a narrow range because of higher inventories and
surplus in the markets. Recently released, China general administration of customs report said
that Aluminium imports were down on a monthly basis by as much as 34%, in February.
This can act as a very big drag for the prices as the markets very heavily rely on the prospects
and triggers from one of the world’s biggest consumer of the metal. China was a net exporter of
the metal until 2008, but significant imposition of export duties and taxes lead to a u-turn in the
consumption levels.

The pattern is changing again and China has started exporting some of its stocks reserved earlier. This will be providing sentimental boost to sellers, though the exports are not substantial.

LME prices were at $ 2279 per tonne on 18th March 2010, marking a rise of 9.7% from 1st February 2010. These are also multi-month high levels for Aluminium.

The inventories have during the same period declined by a marginal 0.15% to 4618200 tonnes. We expect that the prices will be consolidating within a range and any fresh buying and
appreciation in prices will bend down by long liquidation and short positions at higher end.

Fall in production capacity to benefit Aluminium in longer run: IAI
The Aluminium prices are set to benefit from the fall in production capacity across the globe,
which has been a resultant of declining stockpiles mainly in London warehouses and dearth of
electricity in Aluminium, producing regions.

The data from International Aluminium Institute (IAI) for the month of January suggests that the total primary Aluminium production stood at 1995000 tonnes, which was a decline of 4.7%. The total production for the month of Jan 2009 was 2094000 tonnes.

In Asia ex China, the production of primary Aluminium was 396000 tonnes in January 2010 as
against 356000 tonnes in January 2009, up 11.23%.

For the full year ending 2009, the total production of primary Aluminium in Asia was 4401000

China cumulative production increases, Fall on M-o-M basis: China cumulative production of Jan-Feb 2010 stood at 161989 tonnes, up 39% from Jan-Feb 2009 where the cumulative production was 116422 tonnes. The latest data from General Administration of Customs of China said that Aluminium imports from February were 64356 tonnes, which was down 34% from imports of 97633 tonnes in January 2010.
The fall of Aluminium on a monthly basis is expected to check any speculative rise in short term.

The dollar moves are strong which is bringing liquidation in Copper. It will be interesting to see
how the imports of metal stand in coming months from China.

Indian Aluminium production increases in January
Indian Aluminium production increased in the month of January 2010, following the trial run
production from Vedanta Aluminium Limited (VAL). Vedanta has commissioned its smelter at
Jharsuguda from April, 2008.

VAL produced 27367 tonnes of Aluminium in January 2010. On a monthly basis, NALCO
registered a fall of 2048 tonnes in Aluminium production in Jan 2010 when compared to its
production targets of 39200 tonnes.

On a cumulative basis, Nalco’s production for the period of April-Jan 2010 was up by 19.71% to
355893 tonnes as against 297296 tonnes in April-Jan 2009. Bharat Aluminium Company
(BALCO) production for Jan 2010 was 21793 tonnes as against 22298 tonnes the production
target. When compared on a Y-o-Y basis, the cumulative production of BALCO was down
27.20% to 355893 tonnes in April-Jan 2010.

To read the full report: ALUMINIUM


Balmer Lawrie & Co Ltd is an Indian government owned entity that is managed under the guidance of The Ministry of Petroleum and Natural Gas. The company derives its name from two Scotsman (George Stephen Balmer and Alexander Lawrie) who established the firm under a partnership agreement in 1867 at Kolkata. In 1924, it then became a private company only to be converted into a public limited company in 1936. Having dabbled in a range of businesses (including tea, shipping and banking) during its formative years, it has consolidated operations over the years and is now known as a multi-product, multitechnology and multilocation conglomerate, with a strong network of local and global joint ventures and subsidiaries. The company has manufacturing facilities in Chennai, Kolkata, Mumbai, Mathura and Silvassa and international offices in U.K. and UA.E.

This public sector behemoth offers a wide and diversified array of services, rendered under five broad segments namely Industrial Packaging, Logistics Infrastructure and Services, Travel and Tours, Greases and Lubricants and Others (Tea, Leather Chemicals and Refinery and Oil Field Services). Of these segments the biggest revenue growth driver is the Travel and Tours segment followed by the Logistics Infrastructure and Services sector.

Industrial Packaging: Thought this segment contributes less than 1/5th to the company’s overall revenue, it has garnered a huge reputation within industrial circles, and is considered to be the largest manufacturer of industrial package containers. The firm manufactures 165, 200 and 210 ml steel drums that are utilized for safe packing, transport and storage of goods. Utilizing its strong R&D facilities and 6 manufacturing units (Mumbai, Kolkata, Chennai, Panipat, Silvassa and Asaoti) it is able to provide a comprehensive series of drums to its diversified client base that ranges from food companies to chemical companies.

Logistics Infrastructure and Services: The Company has considerable experience in the logistics sector where its involvement dates back to the nineteenth century. It has the distinction of being the only major PSU to offer comprehensive logistic based services. The logistics segment of Balmer Lawrie is further sub-divided into the logistics infrastructure segment and logistics services segment. Under the logistics infrastructure segment, the firm offers warehousing and distributing services and maintains 3 stateof- the-art container freight stations (CFS). Due to its superior infrastructure it is able to offer value added services such as palletisation, shrink wrapping, labeling, re-bagging, repacking, sorting, inland transportation, supply chain intention is to serve as a one-stop shop for its customer’s EXIM needs. As part of its logistic services segment, the firm offers air freight services, ocean freight services, air chartering, ship chartering, express cargo movement and projects logistics management. This firm has a world-wide network in over 50 countries, managed by professionals in the logistics field and it will certainly prove to be a crucial contributor to the firm’s future prospects. Currently this segment contributes almost 24% to total revenue and this figure is expected to increase in the future.

Travel and Tours: Nearly 40% of the firm’s revenue comes from this segment and much of the company’s overall fortunes will depend on this sector. This segment of Balmer Lawrie had the unique distinction of handling the Commonwealth Youth games in 2008. The firm has a large base of IATA approved agents (1500) and over 15000 non IATA approved agents to help it service this largely fragmented industry. Revenues and profits from this firm have grown at a healthy rate over the last 5 years (Revenue CAGR of 17.1% and profit CAGR of 19% from 2005-2009) and this is mainly due to the company’s widespread network all over India.

Greases and Lubricants: This is another segment in which the company has a dominant position, being considered amongst the top 10 grease manufacturers in Asia and the largest in the country. In India 65% of the client base for grease and lubricants consists of automobile companies and the remaining 35% consists of industrial and marine companies. This unit generates sales by selling its flagship lubricant Balmerol and grease processing business and
manufacturing services for other companies.

Others (Tea, Leather Chemicals and Refinery and Oil Field Services): The other segment is the lowest contributor to the overall revenue. The tea business is one of the oldest and traditional businesses of Balmer Lawrie, but the firm has reduced its dependence on this sector. There have been suggestions that the company might do away with its tea business in the long run, but as it is a low contributor to revenue, one does not expect dramatic alterations to the firm’s overall prospects. However the company’s tea continues to be a popular product both domestically and abroad and the company is one of the largest suppliers of bulk and packet tea to Russia & CIS, West Asia and various North African countries. As part of its Leather chemicals business, the firm manufactures and markets performance chemicals for leather processing and is considered to be the market leader in fat liquors. The leather industry is essentially an export oriented industry and this segment’s performance is dependent on the performance of the export sector in general. The refinery and oil field segment provides mechanized tank and lagoon cleaning services and vapour loss prevention measures for various oil refining companies. Because these services are essentially specialized, the firm has been able to establish long standing associations with various refinery companies.

To read the full report: BALMER LAWRIE

>Ninth Annual Investor Conference 2010 (ICICI SECURITIES)

We concluded our ninth annual investor conference in Singapore last evening – over the two-day period, we hosted 36 companies and ~550 meetings. We thought the overall mood at the conference was neutral to slightly upbeat. Corporates are back in a growth phase and are aligning strategies accordingly. With the Government’s budget proposals out of the way and with no signs of any major upheavals in the global markets, most investors appear reasonably comfortable with overall market levels, though there does not appear to be any overt bullishness either. Key highlights from various meetings are detailed below.

India Unlimited

Financials. The banks expect the transition to a base rate regime to be positive for net margins. FDI relaxation is expected to be cleared in the monsoon session of the Parliament (from 26% to 49%). Non banking financial companies (NBFCs) seeking bank licences expect the Reserve Bank of India (RBI) to announce several regulatory requirements and there is also uncertainty on whether NBFCs affiliated to industrial houses could be granted such licences.

IT Services. Tata Consultancy Services (TCS) and Wipro are confident of surpassing NASSCOM’s FY11 target of 13-15% revenue growth (dollar denominated) – we expect FY11E growth to be 20%. Wipro has revised wages as well, effective February (2% onsite and 8-10% offshore).

Metals. The steel companies were quite upbeat. They expect at least 15% increase in domestic steel prices and given low dealer inventories, anticipate raw material price increase to be passed on. Capacity will significantly increase in India over the next few years but will still lag supply.

�� Oil&Gas – Fuel pricing. Bharat Petroleum Corporation (BPCL) expects deregulation in auto fuel pricing in the next 6-9 months and only a minor increase in kerosene prices. ONGC expects APM gas prices to be revised in phases from US$1.8 to US$4.2/mmbtu over the next three years.

Power. JSW Energy expects merchant rates of Rs5 per unit in FY11 and Rs4.5 in FY12. NHPC is in discussions with regulators to consider ~12% return on CWIP.

Real Estate & Infrastructure. Volumes in the residential segment have picked up across geographies with strong demand for mid-income housing and prices, in some locations, have crossed January ’08 highs. The commercial/retail segment remains lethargic. Lanco is looking to restructure and consolidate businesses to improve focus and funding options.

Telecom. The Telecom Regulatory Authority of India (TRAI) chairman presented a keynote address – the health of the industry is also an important consideration for the regulators, in addition to the requirements of the consumer. Rural penetration is another focus area. Mobile number portability (MNP) is likely in three months time.

To read the full report: ANNUAL CONFERENCE